Contrary to the Divisia aggregates, money is still too loose. N-gDp is still too high.


Atlanta gDpnow’s latest estimate for R-gDp in the 1st qtr.: 2.5 percent — April 14, 2023. That combined with the inflation rate puts N-gDp too high. In contrast, Divisia #'s show a contraction.

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re: "Volcker achieved his goal."

Paul Volcker’s version of monetarism (along with credit controls: the Emergency Credit Controls program of March 14, 1980), was limited to Feb, Mar, & Apr of 1980. With the intro of the DIDMCA, total legal reserves increased at a 17% annual rate of change, & M1 exploded at a 20% annual rate (until 1980 year’s-end).

Why did Volcker fail? For two reasons. The first was the failure to recognize monetary lags. Contrary to Nobel Laureate Dr. Milton Friedman, lags are not “long and variable”. The distributed lag effects for both real output and inflation have been mathematical constants for over 100 years.

Second was due to Volcker's operating procedure (which hasn’t changed since Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974. Volcker targeted non-borrowed reserves when at times 200 percent of all reserves were borrowed.

One dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. Legal or required reserves represents the monetary base.

The fact that advances had to be repaid in 15 days was immaterial. A new advance could be obtained, or the borrowing bank replaced by other borrowing banks. That's before the discount rate was made a penalty rate (Bagehot's dictum). And the fed funds "bracket racket" was simply widened, not eliminated. Monetarism has never been tried.

Monetarism involves controlling total reserves, not non-borrowed reserves as Paul Volcker found out. Volcker targeted non-borrowed reserves (@$18.174b 4/1/1980) when total reserves were (@$44.88b).

Then came the "time bomb", (which Dr. Leland Prichard foretold), the widespread introduction of ATS, NOW, and MMMF accounts at 1980 year end -- which vastly accelerated the transactions velocity of money (all the demand drafts drawn on these accounts cleared thru demand deposits (DDs) – except those drawn on Mutual Savings Banks (MSBs), interbank, and the U.S. government).

This propelled N-gNp to 19.2% in the 1st qtr 1981, the FFR to 22%, and AAA Corporates to 15.49%. My prediction for AAA corporate yields for 1981 was 15.48%.

Volcker tamed inflation by imposing reserve requirements on NOW accounts in April 1981.

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Apr 17·edited Apr 18

re: "Volcker would have realized that the Fed was not just tapping on the breaks, but unnecessarily slamming on them from 1978 until early 1982."

That's wrong. Velocity accelerated.


The transactions concept of money velocity, Vt (not Vi), is the rate or speed at which money is being spent (money actually exchanging counterparties). I.e., income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M) whereas Vt (which was observable on the BOG’s “G.6 Debit and Demand Deposit Turnover” release since discontinued in Sept. 1996), is an “independent” exogenous force acting on prices.

And we knew this already:

In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled "Member Bank Reserve Requirements -- Analysis of Committee Proposal" its 2nd proposal: "Requirements against debits to deposits"


After a 45 year hiatus, this research paper was "declassified" on March 23, 1983. By the time this paper was "declassified", Nobel Laureate Dr. Milton Friedman had declared RRs to be a "tax" [sic].

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Divisia M4 includes commercial paper and T-bills. The Fed has no tools with which to influence much less control how many T-bills are bought and sold, not how many short-term corporate IOUs.

Velocity is a residual, not a Fed tool; it is what is left over if one tries to use any M to predict or explain NGDP.

The Volcker Fed paid some attention to nonborrowed reserves from Sep-79 to Dec-82 but only to give the open market wider limits for the fed funds rate. The reserve targets were ostensibly aimed at affecting M1, not M2, but they did not know how or why and it didn't work.

Other than that, the Fed used a 6% discount rate to cause panic and depression in 1921 and 1929, and switched to the interbank market in federal funds (deposits at Fed bank) since 1954. Since flooding that market with reserves under the guise of "quantitative easing" (the only kind there is to a quantity theorist) reserve requirements became redundant and were abandoned. The Fed uses repos and open market operations to manage the federal funds withing narrow targets, and T-bills, prime rates etc. never vary much from the funds rate. When the yield curve is steep, that's stimulative. When it inverts, that's contractionary. If if was even flat, we might yet get a soft landing. Quantities of monetary base or of result aggregates like M2 are just no part of this dangerous game as it is currently played.

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